Red Alert for UK’s Smaller Firms

More than 50,000 mostly smaller firms are in financial distress. What happened, and how they can best recover.

Every executive knows that the economy has its ups and downs. Sometimes profits balloon, and everyone prospers, shareholders and employees alike. Other times, not so much. And during those other times, frail companies get hit hardest.

Such a downturn seems to have come to Britain’s business sector, many of whose firms are approaching red-alert status. The number of companies in financial distress grew 26% in the fourth quarter of last year, according to research from reorganization company Begbies Traynor. The change brings the total companies in critical distress to almost 50,000. Such distress is often a precursor to full-blown insolvency, which last year reached its highest level since 1983. “That number was higher than I expected,” says Rory Singleton, a Korn Ferry senior client partner in the Global Industrial Market practice. 

The emergency has been caused in part by too many companies operating on ballooning, formerly ultra-low borrowing costs. The Bank of England  raised the short-term borrowing rate from 0.1% in December 2021 to 5.25% in July 2023. The higher interest rates, along with surging inflation, have also taken a bite out of consumers’ wallets, says Stuart Richards, Korn Ferry’s sector leader for consumer products. The result has been falling year-on-year sales for 10 out of the 12 months through January, according to government data. “For many fragile companies, this was too much,” Richards says. 

He adds that many smaller companies don’t have a strong enough brand to pass along costs directly to consumers. “Bigger companies are much better suited to weathering hard times,” he says. These companies generally have the financial heft to spend money on product development, as well as to provide customers with items they want at a reasonable price.

For smaller-sector companies, Richards says survival may require changing leadership in favor of executives who are more skilled in dealing with crises. He notes that companies he’s working with have brought in new leaders with digital savvy, astute marketing abilities, and the know-how in mergers and finance required to attract new investment. “They need many strings to their bow,” he says.

For his part, Singleton says the ability to make quick decisions is key to survival. Firm leaders who acted swiftly during the pandemic tended to survive, he says, or at least have a better chance of doing so. For instance, eat-in restaurants that switched to pickup or delivery service seemed to do far better than those that didn’t. “The time you need the best leadership is during a crisis, and that is now for some companies,” he says.

Singleton observes that many of his clients have been focused on improving efficiencies in their operations and finance functions. Such improvements typically mean lower costs per unit of output for the entire company, and hence higher profits.


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